Monday, 15 February 2016

Media a horror show

Media stocks have put on quite a show over the past week. Unfortunately its been a horror show Viacom fell 24% just last week! Traditional media (cable content providers) are suffering. The internet has caused pain for department stores its now turning its eye to media. On demand media delivered through the internet like Netflix, Youtube and even social networks like Facebook are displacing traditional cable viewing. They're cheaper and on demand is a much better experience for customers. Analysts have been concerned about ratings/views and advertising but there are now genuine concerns that users will drop the cable bundle completely. These concerns are even hitting the mighty Disney (they own ESPN.) Even the success of Star Wars the Force Awakens didn't help. These concerns have led to a massive decline in media stocks (see below).

Media share prices

Canary in the coal mine
Viacom owner of MTV, Nickelodeon and Paramount had another disastrous quarter. They have been the canary in the coal mine teenagers these days have never even heard of MTV. These days kids are watching Youtube and Netflix. Some small cable companies have ditched Viacom with minimal impact on subscribers and importantly no regrets. Unfortunately Viacom's channels are no longer must have.

Time Warner
Time Warner the owner of HBO received 43 Primetime Emmys 12 for Game of Thrones they have some of the most must have content. They released HBO Now direct online like Netflix a year ago but even they have seen disappointing subscribers with 800,000 paying customers most expected 1-2 million subscribers. The rest of their networks like Turner are also facing ratings challenges.

Disney think nothing but happy thoughts
That leaves us with Disney. They reported the biggest profit in history thanks to Star Wars but investors shrugged. Now that Star Wars is out the way investors are focused on cable cord cutting. The CEO Bob Iger gave an impassioned defense of the bundle. ESPN is still the must have part of the cable network, 81% of cable subscribers watch ESPN. The situation is bad enough that an analyst asked if Disney would split the network from the theme park business. That isn't going to happen but the CEO replied that media networks have grown 8% a year while the rest of the company grew 23% reducing reliance on this division. We believe Disney is the most interesting media stock because of its brands and diversification of revenues. Unlike MTV their brands still mean something to customers. They have some of the best known characters in the world that will likely be around forever much like consumer staple brands. Concerns around cable cutting will remain but when Procter and Gamble trades at 20x and Disney 15x earnings it's hard to get too negative against the House of Mouse.

Decisive has no position in these stocks. The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.